Cash Flow Statement Notes

Cash Flow Statements - Accounting Unit 3 – Week 13

Purpose of a Cash Flow Statement

The balance sheet reports financial position at a point in time:
$Assets = Liabilities + Owner's Equity$
The income statement reports revenues earned over expenses incurred:
$Revenue – Expenses = Profit$
Businesses need to know their cash position; the cash flow statement focuses solely on cash.

What is a Cash Flow Statement?

The cash flow statement shows all inflows and outflows of cash during a reporting period.
It also shows the cash balance at the end of the period.
It provides insights into areas that other reports don't:
- Net cash inflows from trading operations
- Ability to meet obligations (liquidity)
- Long-term capital and debt arrangements (stability)
- Cash flows from investing activities

Qualitative Characteristics of the Cash Flow Statement

Relevance: It assists users in making decisions by providing crucial information about cash inflows and outflows.
Understandability: It is organized into three main sections (operating, investing, and financing activities).

Classifying the Cash Flow Statement

Accounting standards require reporting cash flows under three classifications:
- Operating activities: Day-to-day operations
- Investing activities: Sale or purchase of non-current assets
- Financing activities: Changes in the financial structure of the business

Classifications of Cash Flows

Operating Activities
- Cash Inflows from:
  - Selling goods for cash
  - Cash collected from accounts receivable
  - Cash from “other” revenues received (interest, commission)
  - GST received
  - GST refund
- Cash Outflows from:
  - Cash purchases of inventory
  - Payments to accounts payable
  - Cash payment of expenses
  - GST paid
  - GST settlement
Investing Activities
- Cash Inflows from:
  - Cash proceeds from the sale of non-current assets
- Cash Outflows from:
  - Purchase of non-current assets for cash
Financing Activities
- Cash Inflows from:
  - Capital injections of cash
  - Taking out a loan
- Cash Outflows from:
  - Owner's cash drawings
  - Loan repayments

Anatomy of the Cash Flow Statement Example

Tim's Tables – Cash flow statement for the month December 2025

Cash flows from operating activities
- Cash sales: $43,000$
- GST received: $4,300$
- Receipts from Accounts receivable: $41,500$
- Payments to Accounts payable: $(41,400)$
- Inventory: $(20,000)$
- GST settlement: $(1,500)$
- Wages: $(31,000)$
- GST paid: $(3,620)$
- Net cash flows from operating activities: $(8,720)$
Cash flows from investing activities
- Shelving: $2,000$
- Office equipment: $(5,000)$
- Net cash flows from investing activities: $(3,000)$
Cash flows from financing activities
- Loan – Aus Bank: $25,000$
- Capital Contribution: $5,000$
- Drawings: $(6,700)$
- Loan – Aus Bank: $(2,000)$
- Net cash flows from financing activities: $21,300$
Net increase (decrease) in cash held: $9,580$
Add bank balance at start (1 December 2025): $5,000$
Bank balance at end (31 December 2025): $14,580$
Cash inflows are positive amounts; outflows are negative (in brackets).
A summary (total) is shown for each category.
The overall increase or decrease in cash held is calculated by adding up the three sub-totals.
The final step is to include the cash held by the business at the start and end of the period.

Analyzing the Cash Flow Statement

Operating activities
- Negative cash flows are a bad sign, indicating over-reliance on available cash, impacting liquidity. If cash isn't generated from operations, it can't be used for investing or financing activities.
Investing activities
- Negative cash flows are not always bad. Purchases of non-current assets usually cost more than sales. These assets are expected to generate cash flow or sales later.
Financing activities
- Positive net cash flows are often good (capital contributions and loan borrowings) as they can fund investing activities. Be careful not to over-rely on loan borrowings because of long-term repayment struggles (impacting stability).

Cash vs Profit

Cash and Profit are NOT the same thing.
Understand the difference between the cash flow statement and the income statement.

Cash vs Profit Examples

A business may earn a profit but suffer a decrease in cash due to:
- Reason: Cash outflows which decrease cash but are not expenses, which do not affect profit
  - Examples:
    - Cash drawings
    - Loan repayments
    - Cash payments for non-current assets
    - More GST Paid than received for the period (including GST settlement)
- Reason: Revenues that increase profit but are not cash inflows, which do not affect cash
  - Examples:
    - Inventory gain
    - Revenue items that increases profit more than the increase in cash inflows
    - Credit sales being greater than receipts from accounts receivable
- Reason: Expense items that decrease profit less than the decrease in cash outflows
  - Examples:
    - Cost of sales being less than cash paid for inventory
A business may suffer a loss but generate an increase in cash due to:
- Reason: Cash outflows which increase cash but are not revenues, which do not affect profit
  - Examples:
    - Capital contribution
    - Loan received
    - More GST received than paid for the period (including GST refund)
- Reason: Expenses that decrease profit but are not cash outflows, which do not affect cash
  - Examples:
    - Inventory loss
    - Inventory write-down
- Reason: Revenue items that increases profit less than the increase in cash inflows
  - Examples:
    - Credit sales being less than receipts from accounts receivable
- Reason: Expense items that decrease profit more than the decrease in cash outflows
  - Examples:
    - Cost of sales being more than cash paid for inventory

Cashflows from operating activities vs Profit

A business may earn a profit but suffer a decrease in cash from operating activities due to:
- Reason: Cash outflows from operating activities which decrease cash but are not expenses, which do not affect profit
  - Examples
    - Cash drawings
    - Loan repayments
    - Cash payments for non-current assets
    - More GST Paid than received for the period (including GST settlement)
- Reason: Revenues that increase profit but are not cash inflows from operating, which do not affect cash
  - Examples
    - Inventory gain
    - Revenue items that increases profit more than the increase in cash inflows from operating activities
    - Credit sales being greater than receipts from accounts receivable
- Reason: Expense items that decrease profit less than the decrease in cash outflows from operating activities
  - Examples
    - Cost of sales being less than cash paid for inventory
A business may suffer a loss but generate an increase in cash from operating activities due to:
- Reason: Cash outflows from operating activities which increase cash but are not revenues, which do not affect profit
  - Examples
    - Capital contribution
    - Loan received
    - More GST received than paid for the period (including GST refund)
- Reason: Expenses that decrease profit but are not cash outflows from operating, which do not affect cash
  - Examples
    - Inventory loss
    - Inventory write-down
- Reason: Revenue items that increases profit less than the increase in cash inflows from operating activities
  - Examples
    - Credit sales being less than receipts from accounts receivable
- Reason: Expense items that decrease profit more than the decrease in cash outflows from operating activities
  - Examples
    - Cost of sales being more than cash paid for inventory
In VCE Accounting SACs and Exams, you may be asked specifically about the cash flows from operating activities as opposed to profit. This does change the nature of your response, because it limits what examples you are able to provide, as you can’t talk about investing or financing activities for those questions.

SAC question - sample response

Cash and profit are different resources.
Net profit = revenues earned - expenses incurred
Net cash = cash receipts - cash payments
Not all cash inflows are revenues, and not all cash outflows are expenses.
One example of how this could occur is that Credit sales ( $50,000$ ) were greater than Receipts from accounts receivable for the same period ( $11,000$ ).
The $50,000$ credit sales will increase net profit immediately. However, the cash received from accounts receivable was much lower, resulting in a lower increase in cash compared with net profit.
Other included examples:
- More GST has been paid than received during the period
- Cash purchases of equipment